Building another runway in the south east of England will demand “substantial” taxpayer subsidies regardless of the location, a high-level independent analysis shows.
A third runway at Heathrow would potentially require £11.5bn of government support, while expansion of Gatwick may need as much as £17.7bn of taxpayer contributions, claims a report by KPMG for Sir Howard Davies’s Airports Commission.
The research was drawn up for the commission before, last month, it shortlisted two designs for expansion at Heathrow and a second runway at Gatwick.
A new hub airport in the Thames Estuary – a scheme backed by Boris Johnson, the London Mayor – will undergo further investigation by commissioners before they decide in the autumn whether it should be added to the shortlist.
According to KPMG’s commercial and financial assessment, a new hub airport on the Isle of Grain in the inner Thames Estuary would demand £64.7bn of government support. The report appears to contradict claims by airport operators that an extra runway could be financed either exclusively or predominantly by the private sector.
Gatwick has said it could deliver a second runway for £5bn to £9bn with no government aid.
Heathrow has raised the prospect of £4bn to £6bn of taxpayer support to improve rail and road links, but has argued that a third runway, at a cost of £17bn, would be largely funded by the private sector.
The KPMG analysis also highlights the potential burden on passengers of runway expansion.
Landing charges – fees that are passed on to passengers through higher ticket prices – would have to rise by 136pc at Gatwick to repay debt raised to fund a second runway, the report claims.
Charges at Gatwick would then need to increase by 2.5pc above inflation every year from 2019.
In order to fund a third runway at Heathrow, to the north west of the airport’s current site, landing charges would go up by 13pc initially, followed by annual increases of 2.5pc above inflation, the research shows. KPMG experts did not assess the Heathrow Hub scheme, which involves lengthening one of the airport’s existing air strips and effectively splitting it in two.
“The scale of the proposed schemes and of the financing challenge associated with each points to the criticality of government support,” the report states. “Government support could take various forms. For example … this could comprise government subsidy of scheme costs. The scale of this subsidy requirement varies by scheme but is in all cases substantial.”
A spokesman for Gatwick said the airport “doesn’t recognise the KPMG figures” and believes it is not a “like-for-like comparison between Gatwick and Heathrow”.
Stewart Wingate, chief executive of Gatwick, stressed at a conference last week that the airport was planning to produce a design that would keep the price tag as close to £5bn as possible in order to ensure it remains competitive and supports low-cost carriers.
He said Gatwick would challenge the commission on its figures, as it believed road and rail improvements that are either already under way or are already planned by Government had been added unnecessarily to the overall costs of a second runway.
A Heathrow spokesman said: “We’ve always known that expanding Heathrow would be cheaper than building a new hub airport, but this evidence shows that both taxpayers and individual passengers would pay less for a new runway at Heathrow than at Gatwick.
“Passenger charges would rise by less with Heathrow expansion, and the taxpayer support required is less than that needed for Gatwick.”
Daniel Moylan, the Mayor’s chief aviation adviser, said he did not accept the capital expenditure figures KPMG used “nor how they have been modelled”.
He said: “Our work has shown that there are realistic outcomes for the Government to make all of the money it spent on constructing the new airport back – upon selling the facility to an operator.
Mr Moylan added: “This includes the acquisition and redevelopment of Heathrow.”
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On Heathrow’s north-west runway option, the KPMG report says (Page 14)
“The capital cost of developing the scheme is estimated at £21.6 billion (comprising £18.7 billion of on-Airport costs and £2.9 billion of off-Airport surface access costs) and this is spread over a 19-year period with costs back-ended (the first five years’ expenditure is just £1.3 billion). This is almost double the existing Heathrow RAB [regulatory asset base] value and likely to require some form of pre-funding or revenue profiling to achieve a financeable credit rating. Even assuming simple indexation of revenues at 2.5% for the period beyond the current price control period (Q6) to 2019, the indicative borrowing would not be repaid by 2050.
In order to meet the full debt requirement, aero revenues must be increased by 19% and then
indexed at 2.5% per annum thereafter. This would mean peak borrowing of £24.2 billion being repaid in full by 2050. If indexation is ignored for the purposes of increasing the aero revenue (which might be closer to reality given the current regulatory settlement) the initial aero revenue would need to be uplifted by 54% at the outset, although that reduces the peak financing requirement to £12.2 billion.
The above assumes that Heathrow’s owners would be responsible for the entirety of the surface access costs outlined. If that assumption is removed, the revenues would need to increase by 13% at the outset (and indexed at 2.5% thereafter) to see peak borrowing of £21.8 billion fully repaid before 2050. Alternatively a rise of 46% in aero revenues at the outset with no subsequent indexation sees peak borrowing of £10.4 billion fully repaid in the period. Rises above these figures would allow a contribution to surface access costs.”
Airports Commission – Interim Report – 0 Paper – High-level Commercial & Financial Assessment of Selected Potential Schemes – 10 December 2013. By KPMG
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On Gatwick’s 2nd runway plan, the KPMG report says (Page 18):
“The capital cost of developing the scheme is estimated at £16.6 billion (comprising £14 billion of on airport costs and £2.6 billion of off-airport (surface access) costs). Whilst this capital expenditure is spread over 21 years, and much of the cost is back-ended (the first five years sees only £0.9 billion expenditure), the anticipated revenue assumptions do not allow debt to be repaid as there is insufficient income to cover the interest on the debt. This is after assuming revenues are indexed at 2.5% from 2019 the period beyond the current regulated cap. Further, at four times the current RAB value, it seems unlikely that the RAB model could be used as an effective means for raising finance for this option.
In order to repay total debt by 2050, aero revenue charges would need to increase by 136% and rise by 2.5% inflation year on year from 2019 and that would give rise to peak borrowing of £13.2 billion.
Alternatively an initial rise of 209% with no further inflationary rise would also see a reduced debt of £8.5 billion fully repaid by 2050. However, that analysis assumes that the airport pays for 100% of the off-airport capital expenditure. Assuming that it makes no contribution to those off-airport costs the revenue is still insufficient to meet interest costs but the increase required to repay the on-airport related debt is a 112% increase in aero revenues from 2019 and indexed at 2.5% thereafter. In that case peak borrowing would be £11.1 billion which could be reduced to £6.9 billion if the initial rise in aero revenues were 171% with no inflationary rise thereafter. Any increase in revenue above that would theoretically allow a contribution to the off-airport capital expenditure.
Whilst the cost of this scheme is low in comparison to the brand new hub options, it is still too large under the revenue assumptions provided to repay the capital cost and would therefore need some form of revenue increase, subsidy or grant from Government. Without a clear economic rationale it is unlikely that the remainder of the funding would be attractive to external investors or third party debt providers so the extent of the Government subsidy may need to be sizeable. It is noteworthy that the cost of the scheme is a few billion pounds less than Crossrail which has some private sector contribution at the margins but is in essence wholly funded by Government.
To derive a proxy figure for potential Government subsidy to support the schemes (as an alternative to simply raising revenue) a breakeven analysis on the capital expenditure costs has been approximated. Reducing capital expenditure by £17.7 billion, the scheme is viable in the base case and this £17.7 billion is therefore an approximation of the level of Government support that might be required. The additional borrowing requirement would fall to a more manageable £1.7 billion.”
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Airports Commission – Interim Report – 0 Paper – High-level Commercial & Financial Assessment of Selected Potential Schemes – 10 December 2013. By KPMG
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